Number of the Week: Disposable Income Isn’t Coming Back Soon

ByPhil Izzo

1.2%: The increase in disposable personal income per capita since the recovery began, adjusted for inflation.

Disposable income growth hasn’t kept up with broader economic expansion during the recovery, and it’s likely to remain under pressure for the foreseeable future.

Income after taxes, or disposable personal income, per capita has grown just 1.2% since the recovery began in June 2009 through the third quarter of this year. By contrast, inflation-adjusted gross domestic product per capita has increased 4.7% over the same period. To be sure, GDP fell further than income during the recession, but the path of recovery has been steadier for economic growth as a whole than individual income.

Consumers have managed to prop up growth in recent quarters. Increased spending accounted for more than a third of the 2.7% GDP growth recorded in the third quarter. Job gains have helped boost spending, but without advancing incomes it will be hard for consumption to drive economic growth.

Economists chalked up much of an October decline in per capita disposable personal income to disruptions from Hurricane Sandy, but there are other factors that suggest a rebound isn’t necessarily in the cards. Despite recent improvements, there’s still a lot of slack in the job market. Unemployment remains high, and employers don’t face as much pressure to raise wages with such a large pool of potential new workers.

Another factor likely to cut into disposable personal income in the New Year is higher taxes. Even if Congress manages to avoid the fiscal cliff, some taxes are likely to rise. Few lawmakers are discussing an extension of the payroll tax cut enacted for 2011 and 2012. (See how much more your taxes will be next year if payroll taxes rise.) When the payroll tax cut took effect in 2011, after-tax income saw a nice bump. The expiration will likely take a similar-sized bite.

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